Cotton futures cool off amid good rain, increase in acreage

Cotton prices have started to fall after reaching a record high in July 2016. Prices on the Multi Commodity Exchange (MCX) have corrected about 10.7 per cent after touching a high of ₹23,650 per bale (of 170 kg each) on reports of improved acreage due to adequate rains in Gujarat and Maharashtra.

Moreover, arrivals of the new season cotton crop in the first week of September from North-India may ease prices further.

Similarly, improved US weather and a bearish world supply and demand report by the US government is pressurising the ICE cotton futures.

Domestic cotton prices surged about 40 per cent to ₹23,650 per bale in mid-July mainly on lower stocks for quality cotton due to below-normal rainfall in the last two seasons.

Due to above normal rains in the country, cotton acreage has been constantly improving in July and August.

According to latest estimates by the government, cotton has been planted on 99 lakh hectares (lh), down 8.9 per cent from 108.7 lh last year. Cotton acreage was down by about 49 per cent in first week of July but the deficit has now shrink by five times and acreage has increased by more than 31 per cent in a month. India’s largest cotton producers — Gujarat and Maharashtra — recovered from slow kharif sowing due to good widespread rains.

To increase supplies, the country is going to register its highest cotton imports in 2015-16, expected to be 18 lakh bales, against the previous import high of 14.6 lakh bales in 2012-13. Moreover, the Centre is selling its existing stock, purchased the under the minimum support price to MSME spinning mills through the Cotton Corporation of India (CCI) e-auction.

Improving weather in the US, the biggest exporter, and news from China, largest consumer, extending its cotton auctions for an additional month, weighed on world cotton prices.

As per latest USDA report, world cotton production for 2016-17 will increase by 1 million tonnes (mt) or 4 per cent compared to last year’s production, while consumption is projected to remain stable as compared to last year’s data.

Production for the US and Pakistan is forecast to increase by more than 23 per cent and 14 per cent, respectively, in 2016-17.

Cotton prices are expected to trade in a negative bias during the coming months due to lower domestic demand as South Indian mills have reduced their capacity by 15-20 per cent as the harvesting season is approaching.

Meanwhile, higher imports and the CCI e-auction are ensuring adequate stocks for domestic mills during the off-season. Moreover, the forecast of lower domestic consumption of cotton and exports of cotton yarn for next season may pressurise prices further. However, weather irregularities and pest attacks may limit the downside if they play any part in coming months.

In case of good weather around the world and limited crop damage, we expect the MCX October contract (CMP: ₹21,140) to rule at ₹20,500 per bale while ICE December futures may drop to 62 cents per pound (CMP: 68.86) in the near- to medium-term.

The writer is Associate Director — Commodities & Currencies Business, Equity Research & Advisory — Angel Broking. Views are personal.

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